The climate-fiscal timebomb: Luxembourg

08 March 2026

Fiscal outlook

Luxembourg recorded a surplus of 0.9% and a debt-to-GDP ratio of 26.3% in 2024. With the country historically maintaining budget surpluses, it slipped into a deficit of around €1bn at the end of 2025, in which defence spending more than tripled.

Deficit measures the level of borrowing in a given year. Debt-to-GDP compares the total public debt to the size of the economy. Both are currently used to determine how much borrowing a member state is allowed to undertake. However, neither measure in itself determines a government’s capacity to sustain higher levels of public investment. Fiscal sustainability depends on growth, the multiplier effects of investment, interest rates, inflation, the structure of the economy and external risks such as climate change. NEF advocates moving away from strict numerical debt targets.

Risking climate costs

Extreme weather events like heavy rainfall and storms have become more frequent in Luxembourg. The July 2021 floods were Luxembourg’s most financially costly disaster on record, with damages exceeding €145m and more than 6,500 homes inundated. Between 1980 and 2023, climatic events like heavy rain, storms and floods, caused €1.262bn in economic losses in Luxembourg, according to the European Environment Agency. This ranks Luxembourg second in terms of economic losses per capita in Europe. The country’s forests are also deteriorating under climate change, with four out of five trees damaged and one in ten not recovering.

What NEF’s modelling shows

Organisation for Economic Co-operation and Development (OECD) projections show Luxembourg’s GDP declining by 8% by 2050 and 12% by 2070 under current policies. Our modelling shows the following:

Under current policies (BAU – business as usual), Luxembourg’s debt is projected to be 30 pps higher than the climate-agnostic baseline in 2050 and 119 pps higher in 2070.

With early EU mitigation and sufficient adaptation spending, debt is 23 pps higher in 2050 and 42 pps in 2070.

Delayed EU investments and insufficient adaptation results in higher debt levels of 26 pps in 2050 and 53 pps in 2070.

EU early action combined with global cooperation results in 1 pps lower debt levels than the climate-agnostic baseline in 2050 and 14 pps lower levels in 2070.

Progressive taxation such as a wealth tax combined with EU early action would increase debt by 8 pps in 2050 and by 10 pps in 2070 compared to the climate-agnostic baseline.